So you’ve decided to buy your first home, here’s what you need to know to get started.
Time to Stop Renting
When you have decided that it may be time to buy, there are some things you will need to consider. This should give you a good idea of what to think about when you are thinking about buying. Owning a home is vastly different from renting, so we’ll be going over the good and the bad of both.
Renting vs. Buying
The first thing you need to figure out is how much you can spend on your home. When renting, you only need to pay your monthly rent plus renter’s insurance. When buying a home, there are several variables you need to consider when shopping.
First is the Mortgage Payment. Three items go into your mortgage payment. One is Principal and Interest. This is determined by the rate, length of loan, and amount borrowed. On a 30yr mortgage this can be estimated to be around $55 for each $10,000 borrowed, e.g. $1,100 for $200,000. This will not change unless you have an Adjustable Rate Mortgage. The other two items included are Property Tax and Homeowner’s Insurance. Both of these are included in the monthly payment, held in an Escrow Account, and paid by the lender when they are due. Tax information can be found on the local county appraiser’s website in most areas. The three I use most often can be found with these links: Nassau County, Duval County, and Camden County. Homeowner’s Insurance is normally $100-150/month, but could be a little higher or lower.
There are additional costs that you need to consider that will depend on the neighborhood. Is the home in a Homeowner’s Association? If it is, you will have to check their annual fees. These vary widely and in this area range from $100-2,000 per year. This pays for community amenities like pools, clubhouses, tennis, etc. Some newer neighborhoods also have Community Development District (CDD) fees. These are a municipal bond taken by the developer for the purpose of putting in roads and infrastructure for the neighborhood. The bond is divided up and each home site will be responsible for the payback of the bond. These also vary widely and can range from $500-2,000 per year. I have only seen these in Florida, but that is not to say they will not ever come into fashion in Georgia. Last, a few neighborhoods have required “Social Club Memberships.” I would steer clear of these for first-time-buying, but to each his/her own.
Here is a video where I go over the math and some more explanation:
Down Payment Assistance
Both Florida and Georgia offer programs that assist First Time Home Buyers. They offer Down-Payment Assistance either as a no payment loan or a bond. This will depend on the specific loan program you are going to use. These videos will explain both state’s programs as well as go over where to find more information on the program websites:
What credit score does it take to buy a home?
Now it is time to reach out to a lender. If you would like information on my favorite local lenders, just let me know. There are several models for calculating your credit score and there is a minimum credit score required for every type of mortgage, however that is only one part of the approval process. Your lender will be assessing your Income, Assets, Debt, Property, and Credit to get you approved. Every mortgage must be approved with particular Debt-to-Income ratios, and this will include “total cost of homeownership.” This is why the section above is vitally important. HOA and CDD dues as well as Insurance and Taxes will be included in this calculation. Remember, $55 gets you $10,000, so having an HOA fee of $660/yr reduces what you can qualify for by $10,000. Make sure you ask your lender for a pre-approval instead of a pre-qualification. These are just a much better indicator of what you can afford.
Remember, just because you are paying $XXXX in rent you may not qualify for $XXXX monthly payment. This is often misunderstood.
The major types of mortgages are Conventional, FHA, and VA. Each has different debt-to-income ratios, down payment requirements, and credit score requirements. This video discusses those differences:
Shopping for Your First Home
Finally, time to go shopping. You are going to enjoy this experience a LOT more if you have gotten pre-approved. This will prevent you finding your dream home just to find out that you cannot buy it. I have gone through this with many first time buyers, and I want to help you avoid this.
A few things to keep in mind:
- Stay within (or very close to) your budget
- Ask what HOA/CDD fees are for neighborhoods you are interested in
- Keep an open mind. It is your first home, statistically not your last
Keep an eye for next weeks topic on the Home Buying Process, so that you know what is going to happen when you find Your First Home!